Global central banks hike rates as Japan steps in to defend the yen

Frankfurt — A host of central banks from across the world raised interest rates again on Thursday, after the US Federal Reserve in a global fight against inflation that is sending shock waves through financial markets and the economy.

Japan, the outlier among major developed economies, kept interest rates steady on Thursday only to be punished as traders pushed the yen to a record low against the dollar — prompting the first intervention by Japanese authorities to support the currency since 1998.

The Fed set the pace on Wednesday with a 0.75% rate hike, its fifth increase since March, and half a dozen central banks from SA, Switzerland and Norway to Indonesia and Taiwan followed suit with rises of similar moves within hours, often issuing guidance pointing to more action to come.

They are fighting inflation rates ranging from Switzerland’s 3.5% to nearly 10% in Britain — the result of a rebound in demand since the pandemic subsided accompanied by sluggish supply, especially from China, and rising prices for fuel and other commodities in the wake of Russia’s invasion of Ukraine.

Central bankers were adamant that curbing runaway price growth was their main task but they were bracing for their actions to take a toll on the economy, as rising borrowing costs typically dampen investment, hiring and consumption.

“We have got to get inflation behind us,” Federal Reserve chair Jerome Powell told reporters after Fed policymakers unanimously agreed on Wednesday to raise the central bank’s benchmark overnight interest rate to a range of 3%-3.25%. “I wish there were a painless way to do that. There isn’t.”

On Thursday, the SA Reserve Bank’s monetary policy committee lifted the repo rate by 75 basis points (bps) to 6.25%. 

The Bank of England also raised its key interest rate to 2.25% from 1.75% and said it would continue to “respond forcefully, as necessary” to inflation, despite the economy probably already being in a shallow recession.

The central bank cut its forecast for the peak in British inflation to just under 11% from more than 13%, after Prime Minister Liz Truss’s plan to cap energy prices, but warned that the policy could create longer-term price pressures.

The Swiss National Bank raised rates  75 bps, which proved not enough to satisfy traders’ expectations. The currency slid more than 2% against the euro after the SNB move.  

Norway’s central bank raised its benchmark interest rate by a widely anticipated 50 bps to 2.25% on Thursday, but said future hikes would be more “gradual”. Norges Bank will probably hike again in November, by 25 bps, though predictions are unusually uncertain at the moment, its governor Ida Wolden Bache said.

“The rate forecast aligns with rate increases of 0.25 percentage points at the meetings in November, December and March,” Bache said. 

World stocks fell close to a two-year low and emerging market currencies plummeted as investors prepared for a world where growth is scarce and credit harder to get.

Market participants have also pushed up their rate expectations for the European Central Bank, which is all but certain to hike again on October 23. It is now seen taking its own interest rate to almost 3% next year from 0.75% now.

Japan opted to hold its rates near zero to support the country’s fragile economic recovery, but many analysts believe its position to be increasingly untenable given the global shift to higher borrowing costs.

“There’s absolutely no change to our stance of maintaining easy monetary policy for the time being. We won't be raising interest rates for some time,” Bank of Japan governor Haruhiko Kuroda said after the policy decision.

Indonesia’s central bank increased interest rates by more than expected on Thursday after the government raised subsidised fuel prices earlier this month, while also supporting the rupiah currency. Bank Indonesia raised the seven-day reverse repurchase rate by 50 bps to 4.25%. 

Taiwan’s central bank increased its benchmark interest rate by a modest amount on Thursday, the third hike this year, as it tries to battle inflation without further weighing down its slowing economy. The central bank raised its policy rate by 12.5 bps to 1.625%, in line with forecasts. 

Meanwhile, Turkey’s central bank delivered another surprise 100 bps rate cut on Thursday, sending the lira tumbling to an all-time low, even as inflation rose above 80%.

Turkey’s lira touched a record 18.42/$, surpassing the level reached during a full-blown currency crisis last December. It edged back to 18.37 by midday.

Analysts called the monetary easing unsustainable and driven by President Recep Tayyip Erdoğan’s effort to lower borrowing costs to stoke exports and investment, and they predicted more currency depreciation ahead.

Unorthodox rate cuts over the past year, along with rising commodity prices, have sent inflation to a 24-year high and sparked a cost-of-living crisis for Turks. The central bank justified the move by citing continued indications of an economic slowdown, and it repeated that it expected disinflation, or a deceleration in the inflation rate, to set in.” 

Reuters
With Bloomberg